Trade tension tariff activity figures to be in effect for more than a while

The heightened and somewhat frenetic pace of tariff activity is ostensibly full-throttle all the time these days, and this week’s events are clearly no exception.

Where to begin? Well, for starters President Trump yesterday announced that the United States plans to place tariffs on $200 billion worth of imports from China, which will take effect on September 24, 2018 at an initial amount of 10%, with the additional level of tariffs increasing to 25%, effective January 1.

But, there is much more to the picture than that, as $50 billion worth of tariffed imports from China were put in place earlier this year. That $50 billion and the aforementioned $200 billion represent roughly half of Chinese-bound imports headed to the United States.

President Trump said in a statement issued by the White House  “if China takes retaliatory action against our farmers or other industries, we will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports.”

Well, China did take a retaliatory step this week, placing $60 billion worth of tariffs on U.S. exports. While the U.S. has yet to move forward with the additional $267 billion in tariffs does not mean it won’t, stay tuned.

In his statement, Trump noted that the tariff actions being taken are a result of the Section 301 process that the USTR has been leading for more than 12 months.

“After a thorough study, the USTR concluded that China is engaged in numerous unfair policies and practices relating to United States technology and intellectual property – such as forcing United States companies to transfer technology to Chinese counterparts,” he said. “These practices plainly constitute a grave threat to the long-term health and prosperity of the United States economy.”

And he added that for months the U.S. has urged China to change these unfair practices, and give fair and reciprocal treatment to American companies. 

“We have been very clear about the type of changes that need to be made, and we have given China every opportunity to treat us more fairly,” he said. “But, so far, China has been unwilling to change its practices.  To counter China’s unfair practices, on June 15, I announced that the United States would impose tariffs of 25 percent on $50 billion worth of Chinese imports.  China, however, still refuses to change its practices – and indeed recently imposed new tariffs in an effort to hurt the United States economy.”

As for the impact of tariff actions on supply chains and consumers, the feedback has largely been that they will raise prices and do more harm than good at the end of the day to be sure.

Take this sentiment from a New York Times report earlier this week, for example: “Unlike the first round of tariffs, which were intended to minimize the impact on American consumers, this wave could raise prices on everyday products including electronics, food, tools and housewares.” All these things are pretty much items being purchased by consumers daily, so the impact is seen in a different light.

Other ways in which they can impact things come in the way of company profits, hiring, and overall growth.

While the cumulative feedback from these tariff actions have been largely negative, they may be more necessary than one thinks, according to Walter Kemmsies, Managing Director, Economist and Chief Strategist for JLL’s U.S. Ports, Airports and Global Infrastructure Group.

In a research note, the esteemed economist explained that tariffs can have unintended consequences because global supply chains are so complex.

“Trade data doesn’t reflect the reality of global supply chains, and supply chains don’t care about political borders,” wrote Kemmsies. “For example, the United States exports automotive parts to Mexico to be assembled into cars. Some of the exported parts are imported back to us in the completed cars. Trade data typically looks at the final value of a product crossing a border, not at the origins of the parts, and it doesn’t reflect the percentage of the value that originated in the United States.

All valid points indeed. What’s more, in an interview, Kemmsies, explained that ever since President Trump “got serious” about taking tariff actions earlier this year, he has been saying all along that eventually it would get resolved, because both China and the U.S. lose, as does the rest of the world for a few different reasons, including: in the long-run, the trade structure of the world doesn’t get adjusted to accommodate the U.S.; and since 1978, the U.S. alone has been running a consistent trade deficit, which worsened when China joined the WTO.

“The world economy has been imperiled for a long time, because the largest economy in the world is running a trade deficit,” he said. “And as long as it was a really small fraction of GDP, it is not a big deal, but we are running [a trade deficit of more than] $500 billion at an annual rate. It is now bigger than what it was before the big crisis of 2007-2009. Something is broken in the world, and in the long run we are going to have more crises.”

And that comes along with the fact that the U.S. is now the world’s largest producer of oil, meaning oil is no longer a factor in the trade deficit, he said.

“What that means is that the way the world’s economy has evolved has left the U.S. out of the loop,” he said. “That is a really bad idea; it is like when the guy with the most beer in the world is not invited to a beer party. The problem is that China, Canada, Germany, and Mexico are all part of these complex global supply chains and going through China for everything is a bad idea. If you are going to fix it, you have to fix the structure, which is China’s position. But our position is that China’s policies need to be revised to be more like that of a modern developed economy…fair market access for all. China’s attitude towards things like agricultural imports are abysmal…with them saying a shipment of the same grain previously sent is now not god enough, due to some made up scientific reason or that the specifications have changed, and our guys get stuck with a boatload of grain and need to find some other place to unload it. The farmers then complain that dealing with China is like trying to build a business out of a casino.”

Kemmsies explained that the U.S. does not want quotas and has not wanted them since George W. Bush was President, noting the U.S. just wants everyone to provide open and fair competitive access to all markets, which is really what needs to change for things to go forward with China. But, he said, that is a challenge for China, because parts of the Chinese economy are very dependent on unfair access to U.S. markets, with the same being the case for Canada, Mexico, and Germany.

All of this means, he said, is that the system remains stacked against the U.S. and a system that has been in place that long that has achieved such volumes cannot be changed overnight. Doing it quickly will make things volatile and somewhat scary, but that may not be the case were it done in the long run, but he said in the long run there could well be another 2009-like crisis, which could be worse than last time.

Despite these trade tensions, Kemmsies said the ultimate outcome is quite positive, noting how you don’t get something good for nothing and everything has a cost.

“That is what we are dealing with now with these trade negotiations,” he said. “In the long run, I think it will work out well, as both China and the U.S. stand to gain tremendously by coming to good terms. China is a wonderful country. You need to be careful with a lot of this ‘us against them’ wording, and that is not good. Tit-for-tat [with tariffs] is futile. I don’t think China is winning this, and I don’t think we’ve felt the costs yet, but it will start soon enough…or imminent.”

The tariff and trade situation between the U.S. and China is a tangled web, which is not easy to crawl out of. It is replete with challenges and obstacles. As Kemmsies observes, things cannot stay on the same course, but the path to get where things need to be will surely not be a straight line.